It’s a common problem for people seeking personal finance advice. They hear plenty of great advice, but there’s no one around to put it all into context. That can be really troubling when two seemingly stellar kernels of wisdom seem mutually exclusive.

The perfect example of this conundrum is the age old question of whether one should pay off his or her debt or if one should instead invest the money that’s left over after base obligations are met.

It’s a tough question because folks get two very compelling stories from financial analysts. On one hand, everyone preaches the virtue of getting out from under one’s debt as quickly as possible. On the other hand, there are many persuasive justifications for building your long-term investments before you reach retirement age. Escaping debt is a good thing. So is investing for the future.

Obviously, these two options are hard to reconcile.  You can only spend a dollar in one place at any given time.  So, which way should you go?  Should you be paying down your debt or socking your money away?

Well, as much as everyone would probably like a straightforward “one or the other” answer, it really isn’t that simple.  The right direction is going to require a comparison of the two options in your particular situation.

You need to determine which option is going to do the most good for you.  That means comparing the amount of money you’re paying in interest on the debts in question against the rate of return on the investment alternative.

For instance, if your investment opportunity promises a 5% rate of return and you have the option to pay down a credit card balance that carries a 15% interest rate, it makes a lot more sense to focus on reducing your debt first.  Any gains you might realize from the investment are going to be swamped by the interest accumulating on the debt.

On the other hand, if your investment opportunity promises a 10% rate of return and your debt servicing option is to pay in excess of the minimum on a student loan that has a 5% interest rate, you should be investing.  You’re going to see a net gain by building your nest egg.

A comparison of interest rates, however, isn’t the only factor you should be considering.  Remember, the goal here is to maximize your financial well-being.  That means that you need to look at anything else that might have an impact on costs or earnings.  In the case of contrasting investment with debt pay downs, that generally means focusing on the investment opportunity (after all, the debt’s behavior is basically fixed).

Investments generally come with some level of risk.  You need to factor in the risk that the investment may under-perform expectations.  It’s also worth considering the possibility that the investment will offer better returns than expected, in situations where that’s a possibility.  You should also take a look at the probable tax implications of your investment choice.  If it’s going to create a greater tax liability for you, that needs to be part of your calculation, too.  Put simply, you need to make a comparison of the debt and the investment that doesn’t glamorize or overestimate the overall success level of the investment.

That sober mathematical work and analytical assessment of the investment should give you a good idea of which direction to go, but there is one other thing to consider.  Recently, we touched on the “psychology of money management” when discussing the debt snowball system.  I argued that money management is not merely an exercise in numbers–it also has a huge psychological component.

When deciding between paying down debt and investment, you need to take a good look at yourself, your habits, your plans and what you need to keep you motivated as you continue to improve your present and future financial circumstances.  Will you feel more inspired to continue making progress with money set aside or will watching your debt dissipate give you a “boost”?  Will you be able to let your investment sit in place, working for you, or are you too likely to “raid” the nest egg if it’s sitting there for you?  These questions can round out your decision as you choose between paying down debt and making an investment.

Personal finance isn’t always crystal clear and making a decision between heftier debt payments and investment is a perfect example of that.  In order to get the right answer, you’ll need to compare the actual “dollars and cents” value of each option and to assess that result in terms of your own personal outlook and money management skills.